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Monday, November 9, 2015

Insurance brokers ‘must advise you properly’

Short-term insurance brokers who recommend you switch your policy to one with a cheaper premium without considering whether the new policy is suitable, are one of the main sources of complaints to the financial advice ombud.

“There is still a belief that providers of short-term insurance do not need to provide advice to their clients,” Noluntu Bam, the Ombud for Financial Services Providers, said in her annual report for the year to March 31, which was released this week.

As in previous years, short-term insurance topped the list of complaints sent to Bam's office; 2 940 of the 9 003 new complaints submitted in 2014/15 were about short-term insurance, according to the report.

Bam said that, when recommending that a client changes policies, many financial services providers (FSPs) focus only on the cost of the premium but fail to disclose how a higher excess, the requirement that more stringent security measures be installed, or enhanced exclusions may affect the success of a claim.

There has also been an increase in complaints about commercial insurance policies where, because FSPs did not come to grips with the “intricacies” of the policy wording, items were covered under the incorrect sections of the policy, Bam said. This shortcoming was compounded by FSPs not properly understanding the nature of their client’s business, which “often has a disastrous effect” on the business when the client tries to claim.

Referring to complaints about the Relative Value Arbitrage Fund (RVAF), a Ponzi scheme that masqueraded as a hedge fund, Bam said that “almost all the investors who complained to the FAIS Ombud gave a somewhat glowing account of what was supposed to be a successful investment, until the sudden revelation of the true state of affairs following the death of [Herman] Pretorius [the head of the RVAF]”.

The scheme collected about R2.2 billion from about 3 000 investors before it collapsed in July 2012. To date (not the financial year to March 31), Bam has made 22 determinations against three advisers to repay a total of R12.26 million to 22 investors.

“We find that, as more South Africans experiment in the vast and complicated world of the financial services industry, more dubious elements are taking advantage of their ignorance,” Bam said.

“Through our investigations, we have come across investment schemes that exist with no visible and rational means of generating the returns they claim. These investment schemes have only managed to reach investors because they are prepared to pay substantial sums of money by way of commissions to independent providers (brokers). Unless providers recognise that they are a vital link to the consumers and refuse to participate in what are often sophisticated lies, the trusting and ignorant consumer will always fall prey.”

Apart from short-term insurance, Bam highlighted the following trends in the complaints her office received in 2014/15:

* Disability products. The number of complaints about disability insurance is growing, and attention must be given to how these products are sold, Bam said. In some cases, there is “clear evidence” that consumers are being sold cover they do not need, she said.

Disability insurance is being sold through various channels without the necessary advice, Bam said.

In many of the complaints, the cover was sold as an adjunct to a credit transaction, she said, adding that one can walk into outlets where credit is extended and find employees who know very little about insurance trying to persuade consumers to open an account and take out cover, usually against death and disability.

* Assistance (funeral) business. Bam said there has been “an unrelenting” increase in complaints about funeral businesses, adding that the numerous complaints demonstrate a “clear unwillingness” by providers to comply with the General Code of Conduct under the Financial Advisory and Intermediary Services Act.

A large number of the complaints were about unauthorised debits in respect of policies to which consumers had not agreed, Bam said.

In some cases, consumers lodged complaints in an attempt to compel funeral cover providers to pay for illegitimate claims, she said.

* Post-retirement planning. FSPs do not adequately advise clients of their post-retirement product options and how essential it is that they preserve their capital so that it can generate an annuity for the rest of their life, Bam said.

FSPs often justify their recommendations by saying the client had only a single need – namely, to receive a monthly income. As a result, a retirement product is selected without taking into account any of the other factors that may affect the client’s finances, Bam said.

Another common problem is an attempt to remedy an inadequate provision for retirement by choosing alternative investments that have “enormous” risks, “often with disastrous consequences”, Bam said.

Of all the post-retirement products, living annuities are “most susceptible to negligent and inappropriate advice”, with FSPs allowing clients to drawdown an income that cannot be supported by the performance of the underlying portfolio. The result is a rapid reduction of the capital when the investor is no longer economically active and is incapable of recovering any losses, Bam said.

* Credit life insurance. The number of complaints about credit life insurance has increased “exponentially” over the years, Bam said. Complainants often claim that the limitations or exclusions were not explained to them when they were sold the product, which “goes to the heart of advising clients and recommending solutions that are suitable to their needs. The paperwork we have seen from many of the providers leaves a lot to be desired,” Bam said.

The Office of the Ombud for Financial Services Providers received 9 003 new complaints in the year to March 31, 2015 (9 439 in 2013/14), of which 3 699 (3 191) fell within the ombud's jurisdiction.

Of the 9 003 complaints received, 2 496 (2 117 in 2013/14) were dismissed; 4 524 (4 932) were referred to financial services providers or other ombuds or regulators; 614 (538) were settled without the ombud issuing a determination; and 1 369 (1 852) were carried over to the 2015/16 year.

Cases (which includes complaints received in previous financial years) were resolved as follows in 2014/15: 4 741 were referred to other forums, 3 414 were dismissed, 976 were settled (789 in 2013/14), and 45 (23) determinations were issued.

CONTACT

The Office of the Ombud for Financial Services Providers deals with complaints by clients against financial services providers, such as advisers and brokers.